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With institutional investors, regulatory authorities, the financial press, and the fear of lawsuits all pressuring boards of public corporations to be more active, many directors are seeking practical ways to conduct strategic oversight. Gordon Donaldson's strategic audit provides an orderly way for boards to review strategy without invading management's territory. Usually, there are three triggers that motivate boards to get involved in strategy: the retirement of a CEO, a precipitous decline in profitability, or an unsolicited takeover attempt. These triggers force a board into a reactive mode and are not conducive to effective oversight. Managers are expected to turn strategic vision into operational reality, but directors represent shareholders and must evaluate strategy based on how the company's returns compare with those of other investment opportunities. Donaldson suggests that a low-key, behind-the-scenes audit of strategy, designed to lend credibility to management's leadership and not undermine it, is an important board tool.

A study of 12 mature industrial companies shows that managing a financial goals system is a complex process in which competing and conflicting goals must be balanced. Once a company recognizes that its goals are interdependent and that trade-offs among them are necessary, it tends to emphasize market priorities in order to preserve its standing in the industry. In selecting its company's financial objectives, management should specify realistic time horizons for achievement, ensure that all primary goals are consistent with one another, and account for changing economic and competitive conditions.

In practice, management makes debt-capacity decisions by drawing on advice from external sources. This method of decision making fails to assess how much risk is actually involved for an individual company. Management must formulate an approach to the measurement of risk applicable to individual corporations. Expressing the limits of long-term borrowing in terms of an income statement of data, rather than the conventional balance sheet relationship between long-term debt and the total of all long-term sources, provides a more meaningful ratio for internal formulation of policy. This article, first published in 1962, is reprinted to include a retrospective commentary by the author.

Companies should develop contingency plans aimed at preserving and managing the flow of funds to handle the problem of the unforeseen event. Companies should first maximize the amount of available reaction time by conducting a contingency analysis of possible events that would affect the company's performance. A computerized model of the company's finances can simulate contingency events and explore a range of alternative actions. The company should then make an inventory of resources it could draw upon to cover unexpected deficits.